Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

Retirement … retirement … retirement. Most of us are painfully aware that the responsibility for providing for ourselves in retirement rests squarely on our own shoulders. If we didn’t fully appreciate this sobering situation before, we certainly do now.

Retirement is very important. But is it the most important reason to save?

I continually get questions from shareholders about priorities: What about our kids’ educations? What about buying a house? Should I be saving for retirement if I’m carrying credit card debt?

Before I address any of those issues, I ask one question: How big of an emergency fund do you have?

There’s often a hesitation before answering. That’s worrisome.

Investors tend to “bucket” their investments, earmarking some for retirement, some for general savings including education, some for the vacation—but they often overlap the funding as well. Since an emergency fund needs to be readily available in a bank savings account or money market fund, we frequently look at our general savings as the emergency-vacation-if-we-buy-a-new-car-or-need-a-new-roof fund. The emergency fund gets overlooked and may not be there when and if you need it. Then I get the concerning comments—like, “If I really need the money, I’ll take it out of my 401(k).” While this is a strategy that can work, it’s a big gamble.

Establishing an emergency fund and building it up over time to carry you for whatever period you think is reasonable (often three to six months, or sometimes a year) will at least give you a realistic picture of what you have left for retirement savings, college funding, or debt reduction.

Take our current economic environment. If you lose your job or have major medical expenses, you may have already expended your general savings to cover other expenses that have cropped up, as they always do. Then, your 401(k) is your emergency fund.

You can’t do everything at once, but you can work towards multiple goals—if you plan carefully.

As a country, we’re not saving much now, though there has been some improvement in the last few quarters. “Balance” is the operative word; building an emergency fund and balancing it with retirement saving—a critical priority—is one of the keys.

Try to restructure your spending (in other words, spend less) to free up cash that can gradually become your reserve. This can help you resist the temptation to put your retirement contributions on hold. Even in the current environment, your employer may still be matching a portion of your contribution, so walking away from that “free money” is hazardous. Look at it this way: Your employer match represents an immediate 100% increase in the value of your contribution. So, think carefully before you stop contributing. And if you do have to take this step, make sure it’s temporary, because starting up again could be very difficult. Failing to get back to it could leave quite a hole in your retirement bucket.

Unfortunately, there may be times when you simply have to use every available dollar to meet expenses. The good thing is that you have that money available at all—regardless of what bucket you take it from.

Notes:

• All investing is subject to risks.

• The link to BEA.gov will open a new browser window. Vanguard accepts no responsibility for content on third-party websites.

• When taking withdrawals from a qualified plan before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

• We invite your comments on this Vanguard Blog entry. Comments will be monitored and published at Vanguard’s discretion. Comments received prior to July 7, 2009 will not be published.

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Ellen Rinaldi

Ellen Rinaldi has held a variety of leadership positions since joining Vanguard in 1997. At present, she serves in our Planning and Development division, where she is responsible for protecting client information, among other key responsibilities.
Previously, Ellen directed Vanguard's Advice Services Group, which provides financial planning and advice to retail and institutional clients. She also oversaw our Investment Counseling & Research team, which supplies portfolio recommendations to clients along with topical commentary and investment counseling. Ellen also managed Vanguard's retirement agenda, including the development of new products and services to help our shareholders reach their retirement goals.
Prior to joining Vanguard, Ellen spent 20 years in the insurance industry. She holds a B.A. from the University of Connecticut, a J.D. from Suffolk University, and an LL.M. from Boston University.

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At Vanguard, we’ve always believed in candid, direct communication with investors. In fact, it’s one of our core principles. In 2009, we created the Vanguard Blog so that we could talk about what’s happening in our industry and in the economy—and hear what’s on the minds of investors like you. More

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.